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The value of switching costs

Author

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  • Biglaiser, Gary
  • Crémer, Jacques
  • Dobos, Gergely

Abstract

We study a dynamic model with an incumbent monopolist and entry in every subsequent period. We first show that if all consumers have the same switching cost, then the intertemporal profits of the incumbent are the same as if there was only one period. We then study the consequences of heterogeneity of switching costs. We prove that even low switching cost customers have value for the incumbent: when there are more of them its profits increase as their presence hinders entrants who find it more costly to attract high switching cost customers.

Suggested Citation

  • Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2010. "The value of switching costs," IDEI Working Papers 596, Institut d'Économie Industrielle (IDEI), Toulouse, revised 30 Oct 2012.
  • Handle: RePEc:ide:wpaper:22317
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    References listed on IDEAS

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    1. Yuxin Chen & Jinhong Xie, 2007. "Cross-Market Network Effect with Asymmetric Customer Loyalty: Implications for Competitive Advantage," Marketing Science, INFORMS, vol. 26(1), pages 52-66, 01-02.
    2. Bouckaert, Jan & Degryse, Hans & Provoost, Thomas, 2010. "Enhancing market power by reducing switching costs," Economics Letters, Elsevier, pages 131-133.
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    4. Gary Biglaiser & Jacques Crémer, 2011. "Equilibria in an infinite horizon game with an incumbent, entry and switching costs," International Journal of Economic Theory, The International Society for Economic Theory, vol. 7(1), pages 65-75, March.
    5. Kim, Moshe & Kliger, Doron & Vale, Bent, 2003. "Estimating switching costs: the case of banking," Journal of Financial Intermediation, Elsevier, pages 25-56.
    6. Frankel, Jeffrey A., 1988. "Recent estimates of time-variation in the conditional variance and in the exchange risk premium," Journal of International Money and Finance, Elsevier, pages 115-125.
    7. Anderson, Eric T. & Kumar, Nanda & Rajiv, Surendra, 2004. "A comment on: "Revisiting dynamic duopoly with consumer switching costs"," Journal of Economic Theory, Elsevier, vol. 116(1), pages 177-186, May.
    8. Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, Elsevier.
    9. Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2013. "The value of switching costs," Journal of Economic Theory, Elsevier, vol. 148(3), pages 935-952.
    10. Joseph Farrell & Carl Shapiro, 1988. "Dynamic Competition with Switching Costs," RAND Journal of Economics, The RAND Corporation, pages 123-137.
    11. Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 375-394.
    12. Taylor, Curtis R, 2003. " Supplier Surfing: Competition and Consumer Behavior in Subscription Markets," RAND Journal of Economics, The RAND Corporation, pages 223-246.
    13. V. Brian Viard, 2007. "Do switching costs make markets more or less competitive? The case of 800-number portability," RAND Journal of Economics, RAND Corporation, pages 146-163.
    14. Jiawei Chen, 2011. "How do Switching Costs Affect Market Concentration and Prices in Network Industries?," 2011 Meeting Papers 1428, Society for Economic Dynamics.
    15. V. Brian Viard, 2007. "Do switching costs make markets more or less competitive? The case of 800-number portability," RAND Journal of Economics, RAND Corporation, pages 146-163.
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    Cited by:

    1. Ruiz-Aliseda, Francisco, 2016. "When do switching costs make markets more or less competitive?," International Journal of Industrial Organization, Elsevier, pages 121-151.
    2. Bouckaert, Jan & Degryse, Hans & Provoost, Thomas, 2010. "Enhancing market power by reducing switching costs," Economics Letters, Elsevier, pages 131-133.
    3. Lam, Wing Man Wynne, 2014. "Switching Costs in Two-sided Markets," TSE Working Papers 14-517, Toulouse School of Economics (TSE).
    4. Andrew Rhodes, 2014. "Re-examining the effects of switching costs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 161-194.
    5. Bar-Isaac, Heski & Cuñat, Alejandro, 2005. "Long-term debt and hidden borrowing," LSE Research Online Documents on Economics 24661, London School of Economics and Political Science, LSE Library.
    6. Jean-Pierre Ponssard, 2008. "Short term entry barriers may be good for long term competition," Working Papers hal-00347663, HAL.
    7. Guillem Roig, 2017. "Duopolistic competition in markets where consumers have switching costs," DOCUMENTOS DE TRABAJO 015621, UNIVERSIDAD DEL ROSARIO.
    8. Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2013. "Heterogenous switching costs," IDEI Working Papers 809, Institut d'Économie Industrielle (IDEI), Toulouse.
    9. Rhee, Ki-Eun, 2014. "What types of switching costs to create under behavior-based price discrimination?," International Journal of Industrial Organization, Elsevier, pages 209-221.
    10. Guy Arie & Paul E. Grieco, 2014. "Who pays for switching costs?," Quantitative Marketing and Economics (QME), Springer, vol. 12(4), pages 379-419, December.
    11. Lam, W., 2015. "Switching Costs in Two-sided Markets," CORE Discussion Papers 2015024, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    12. Bruno Versaevel, 2015. "Alertness, Leadership, and Nascent Market Dynamics," Dynamic Games and Applications, Springer, vol. 5(4), pages 440-466, December.
    13. Luis Cabral, 2016. "Dynamic Pricing in Customer Markets with Switching Costs," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 43-62, April.
    14. Atal, Juan Pablo & Fang, Hanming & Karlsson, Martin & Ziebarth, Nicolas R., 2017. "Exit, Voice or Loyalty? An Investigation into Mandated Portability of Front-Loaded Private Health Plans," IZA Discussion Papers 10871, Institute for the Study of Labor (IZA).
    15. Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2013. "The value of switching costs," Journal of Economic Theory, Elsevier, vol. 148(3), pages 935-952.
    16. Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2013. "Heterogenous switching costs," TSE Working Papers 13-451, Toulouse School of Economics (TSE), revised Oct 2015.
    17. Fabra, Natalia & García, Alfredo, 2012. "Dynamic Price Competition with Switching Costs," CEPR Discussion Papers 8849, C.E.P.R. Discussion Papers.
    18. Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2014. "Heterogenous switching costs," CEPR Discussion Papers 9809, C.E.P.R. Discussion Papers.
    19. Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2016. "Heterogeneous switching costs," International Journal of Industrial Organization, Elsevier, pages 62-87.
    20. Luis Cabral, 2012. "Switching Costs and Equilibrium Prices," Working Papers 12-04, New York University, Leonard N. Stern School of Business, Department of Economics.
    21. Gary Biglaiser & Jacques Crémer, 2016. "The Value of Incumbency in Heterogeneous Platforms," CESifo Working Paper Series 5829, CESifo Group Munich.
    22. Biglaiser, Gary & Crémer, Jacques, 2016. "The value of incumbency in heterogeneous platforms," CEPR Discussion Papers 11207, C.E.P.R. Discussion Papers.
    23. Gary Biglaiser & Jacques Crémer & Gergely Dobos, 2014. "Heterogenous Switching Costs," CESifo Working Paper Series 4587, CESifo Group Munich.
    24. Biglaiser, Gary & Crémer, Jacques, 2016. "The value of incumbency for heterogeneous platforms," TSE Working Papers 16-630, Toulouse School of Economics (TSE), revised Nov 2016.

    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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